Pellet export conference focuses on important contract terms

Pellet producers who have not gotten into export markets may not realize the multitude of factors they’ll need to specify in sales and shipping contracts. Roderick W. Simmons of law firm Hirschler Fleischer was at the North American Biomass Pellet Export Conference in New Orleans Sept. 8- 9 to address aspects of contracts that producers will need to be aware of to begin shipping overseas.

To begin, Simmons introduced the International Commercial Terms, or Incoterms, which define the roles and responsibilities of buyers and sellers, including the division of costs such as insurance. The two most common sets of Incoterms Simmons said he’s encountered are Free On Board (FOB) and Cost, Insurance and Freight (CIF). Under an FOB contract, sellers are responsible for getting the pellets to the ship, the subsequent responsibilities of the transaction falling upon the buyers’ shoulders. CIF contracts are the opposite, he added, saying the buyer takes over responsibilities upon discharge of the pellets off the ship.

Simmons continued into a list of contract aspects, beginning with basic commercial terms that will need to be agreed upon between supplier and buyer. Those include tonnage, price, contract term, pellet specifications, and number and frequency of shipments over the life of the contract.

“In the purely shipping mechanics arena,” he continued, “there are a number of things that need to be ironed out.” He listed nomination of port and of vessel, loading and discharge rates, and several other factors. Delivery-related terms include weight determination, payment, sampling and analysis, and acceptance and rejection.

Nonperformance aspects that need to be considered include remedies upon contract breach, termination provisions and credit support. Last, Simmons discussed the inclusion of allocation of certain risks into contract negotiations. That includes sustainability criteria, warranty limitations and liability limitations.

The well-rounded and educational panel also included Henrik Christiansen, of Oldendorff Shipping, who informed attendees about the shipping industry as it relates to pellet exports. “We are the biggest carrier, I believe, of pellets for the last five years,” he said.

Pellets are still a “new” commodity, he said, experiencing just in the past three years the weeding out of what Christiansen called “cowboys,” those who called themselves producers but were ill-equipped to enter the pellet market. It was commonplace for prospective producers to underestimate storage, logistics, construction and more, he said, adding that the industry environment has improved. “Today is much better,” he said. “People in the industry know what they’re doing and it’s much more professional.”

Most of the 1.3 million metric tons of pellets Oldendorff has shipped in the past three years went to Europe, with the U.K. emerging as a strong pellet user. But pellet shipping can be tricky, Christiansen said. “In the beginning, ship owners were scared of pellets,” he said.

The stowage factor of pellets is larger than that of coal, he cited, pellets can’t get wet, and the temperature in the cargo hold needs to be monitored. Carbon dioxide is an involved topic that Christiansen ventured could most likely make up an entire conference on its own, saying some argue carbon dioxide systems are necessary in cargo holds and some say they’re not. ICAP Shipping broker David Elsy also addressed the topic in his presentation outlining differences between shipping chips and pellets. Of the 2,000 bulk carriers equipped for pellet shipments, only 60 percent have a carbon dioxide component, he said. “The fact is today, if you want to carry pellets on a ship, you need carbon dioxide,” Christiansen said, adding that the mentality could and most likely will change, but it will take time.

Concluding his presentation, Christiansen showed a line graph depicting the shipping market, saying it’s the definition of volatile. Indeed it was, dipping and peaking erratically between 2003, when China entered the shipping market, and 2011. The market seems to be leveling out now, but Christiansen told attendees it is hard to predict as illustrated by the graph.

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